It’s at your vacation home, you whining harpy. (By the way, this picture was taken in Florida. Miami, to be precise. On February 11. A school day.
As philistines and libertarians, we make it a point never to listen to NPR nor watch PBS (why would we, they don’t broadcast football.) Unless, of course, NPR runs a story on a college classmate of ours. Especially with such an auspicious introductory line:
There are wealthy Canadians buying multimillion-dollar beachfront homes. And there are people like “Kirk”, who recently bought a 2-bedroom condo in Fort Myers, Fla., sight unseen.
Kirk is the high school teacher in question, and it’s not as if he retired from a lucrative career in personal finance before switching careers. He paid $56,000 for the condo, which sounds like a price out of the 1970s.
The NPR interviewer didn’t ask him how he afforded a vacation home on a teacher’s salary, especially with a couple of kids to feed. Nor did NPR ask him how he ever managed to date Khyrstine Thibeault, the hottest girl on campus, despite being neither a jock nor a rich kid nor remarkably good-looking. That’s where Control Your Cash came in. Kirk elaborates:
We went on vacation to Fort Myers Beach about 3 years ago, but I knew the price was cheaper inland than it was near the Gulf. We actually didn’t stay near this particular unit at all.
We bought the unit in early May and then we saw it in late August. We bought through Florida Home Finders of Canada in Brampton, Ontario. I saw pictures of the unit, went online to see what the area was like, what units were going for, etc. We didn’t use, or need, an appraiser or home inspector because FHFC had done all the legwork.
I borrowed C$50,000. I had $10,000 from a condo sale that went sour in Whitby, Ontario. With the Canadian dollar at U.S. 96¢ the Fort Myers condo was a shade under C$60,000.
By go sour, he means that the condo company went out of business and he got his down payment back.
I paid for it with a home equity loan over 25 years. I think it was 3½% or 4%. I wanted to keep it separate from the mortgage on my primary residence in Canada, just in case we do a home renovation. (If we do,) then I will extend my mortgage.
If you’re thinking about a big purchase like this, especially if it involves big financing like this, understand that a 3½% mortgage and a 4% mortgage aren’t interchangeable. You don’t just round the number to the nearest integer and hope for the best. If the interest rate on this home equity loan is 4%, Kirk would be paying $263.92 monthly. Which is $79,175.53 over the course of the loan. If it’s 3½%, he’d be paying $250.31 monthly, or $75,093.54. Or $4.081.99 less over the course of the loan.
I have an off-site property management company that guarantees me a renter and takes 8%. Every month they rent it out for $792, and deposit my share of that in my bank account. The homeowners association takes their $273 (Editor’s note: holy crap) and then I’m left with about 470ish a month. ($455.64, by our calculations.) I pay $122 on my loan every 2 months, (sic, he means weeks) so I guess I’m ahead about $200 every 2 months (not sure what he means here, but we think it’s “every month”. See below). My tax bill was just under $1000 at the end of the year. Tax time is coming up, I’m not sure what to expect there.
Our take? This condo was a sufficiently smoking deal that Kirk will still profit from despite making a couple of mistakes.
Here are a few tips if you fancy yourself a low-level land baron:
1. Know your numbers. Nothing’s more important than this.
Kirk had only a hazy idea of his interest rate. A 50-basis point difference is huge. His low estimate is 1/8 less than his high estimate.
Assuming the higher estimate, he nets a pre-tax $205.33 monthly. Hopefully a) it’s a fixed-rate mortgage and b) Kirk knows that it is.
2. This doesn’t necessarily apply to Kirk, but know your terms, too. If you don’t, ask someone. Keep asking people until the answer is no longer ambiguous. We know of one 40-something apartment dweller who was ready to “send some guys over” to deal physically with her old landlord. Why? Because she had been on a lease option, which works like a regular rental arrangement for a fixed term. At the end of the term the renter has the option to buy the place.
She had never heard the term before, and assumed that it meant her monthly payments were going toward eventual ownership of the condo, like an ordinary mortgage. No, those monthly payments were going to pay her landlord’s mortgage. Her lease expired and she had neither the tens of thousands of dollars on hand, nor financing in lieu, to buy the place. She had been nothing more than a renter, and didn’t even realize it.
(Editor’s Note: Therefore, a lease option is a wonderful thing to be on the other side of. Worst-case scenario, you sell your property for a price you already agreed to, all the while having had your mortgage payments taken care of by the renter. Better-case scenario, the lease term expires, the renter can’t afford to exercise the option and you get to keep owning the place. There’s an excellent chance of that happening. There’s a reason why most renters are renting, and that reason is fiscal indiscipline.)
Assuming Kirk’s numbers are consistent, more than 40% of his net condo revenue goes to taxes. Still, if he’s “getting paid” $1400 a year to own a modest vacation home, there are worse places for him to have put that home equity loan.
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